The Amazing Shrinking Car Market - Autoline on Autoblog with John McElroy

As car sales continue to spiral downward, some product planners in the industry are beginning to ask the unthinkable: is the American car market going to shrink permanently?
They are starting to consider the possibility that the days of selling 17 million new vehicles every year are over, and that going forward the American auto market is going to be smaller.

There are a number of reasons why product planners are beginning to contemplate this possibility, but the two biggest causes are the high cost of oil and the skyrocketing costs of regulations. Amazingly, even though raw material costs are soaring at rates never seen in a century, the car companies say that pales in comparison to cost pressures they're grappling with due to CAFE, the California CO2 standard, and upcoming safety standards.

Whatever the cause, if, and I emphasize if, the U.S. car market is indeed going to be smaller in the future, that would have a drastic and painful impact on the manufacturing base in the country.

John McElroy is host of the TV program "Autoline Detroit". Every week he brings his unique insights as an auto industry insider to Autoblog readers. Follow the jump to continue reading this week's editorial.

The impact on the manufacturing base will show up in not-so-obvious ways, too. For example, as the industry switches from V6 and V8 production to 4-cylinder engines, it will not need as much casting or forging capacity. After all, one V8 block equals two 4-cylinder ones. The same goes for the heads, the cranks, pistons and con rods. And that means it'll need a lot less machining capacity.

There's no question that car prices are going up, and will continue to go up for the foreseeable future. For nearly two decades now, the massive profits that car companies made on full-size pick-up trucks and SUVs literally subsidized the cost of selling passenger cars. With sales of pick-ups and utilities in the tank, automakers can no longer afford to use passenger cars as loss leaders. They're going to raise prices. They'll do it slowly to be sure, so that most people don't notice it at first. They'll raise them 1% here or 2% there, whenever and wherever the opportunity presents itself, even pushing through several price increases a year.

And as those prices go up, they'll start to push customers on the fringes to seek out other alternatives, like keeping their old car longer, or turning to public transportation, car pooling, bicycling, or even telecommuting. And if the market shrinks, that means the industry will have lower economies of scale-fewer vehicles to spread their costs over. That too will cause prices to go up, and force more people out of the market.

Actually, as I've written here before, there is already a long-term trend in place of fewer people buying new cars. In the 1970s typically 7% of the population marched into a show room and bought a new car every year. In the 1980s and 90s that fell to about 6%. Last year it dropped to 5.4%. It varies from year to year, but the trend is unmistakable.

What has saved the industry up to now is that the population of the United States continues to grow ever year, by more than 3 million people. That means every 10 years we're adding over 30 million people, and a lot of them have to buy cars.

That's why I have a hard time believing the U.S. market will permanently shrink. But I'm not the one doing product planning for the car companies. And the ones who do tell me they are starting to plan for that possibility.


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